If Constellation Energy and/or Electricite de France really want to consummate the expansion of their nuclear-energy venture, the Maryland Public Service Commission just made it possible. The PSC would require $110 million in rebates for residential BGE customers as part of the deal. And it wants Constellation to make a $250 million investment into Baltimore Gas & Electric to boost its capital. It also wants to start the process of installing new legal barriers between BGE and Constellation.

But the conditions fall short of what was requested by Gov. Martin O'Malley. He wanted a customer rebate more than twice as big as what the PSC is requiring. And he wanted some kind of restriction or other action on the pay of Constellation CEO Mayo Shattuck. But the PSC took a pass on Shattuck's pay, as it should have. "But even if we might, as individuals, question the wisdom of paying anyone millions of dollars a year given CEG's recent history, it is our role as Commissioners to focus on BGE and its ratepayers," the PSC said in its order.

The conditions don't seem to be deal-killers if Constellation and EDF really want to go through with the transaction. Given recent reports that EDF's new CEO has doubts about the deal, and given that Constellation doesn't need EDF's money as much as it once did, that is very much open to question.

Posted by Jay Hancock at 1:37 PM | Permalink | Comments (5)
Categories: BGE/electricity
        

And we're liveblogging the PSC decision on Constellation and EDF. EDF and Constellation want to have EDF buy half of Constellation's nuclear-energy business for $4.5 billion.

The Public Service Commission approves the deal with "conditions." One of the conditions is "a distribution rate credit to Baltimore Gas & Electric residential ratepayers of $110.5 million." Note -- every BGE residential customer gets a distrubtion credit, whether you have switched electricity suppliers to WGES or anybody else.

"The total $110.5 million rebate will provide a credit of approximately $100 for each BGE residential customer."

UPDATE: The PSC is basically asking EDF and Constellation to divert money they were going to spend on a visitor center at Calvert Cliffs, charitable contributions, a delay in a distribution rate increase etc. and spend it instead on the residential ratepayer credits.

"This condition should not restrict EDF or CEG from building a visitor center or funding CEG's foundation or both," the PSC says.

UPDATE: Another condition of the EDF investment: Constellation has to put $250 million in cash into Baltimore Gas & Electric between now and June 30. Future dividends paid by BGE parent Constellation would also be restricted.

UPDATE: The PSC tells Constellation and EDF they have until Nov. 6 -- next Friday -- to say whether or not they intend to go through with the deal.

And more:

-- Whether or not EDF and Constellation build a third reactor at Calvert Cliffs is up to them, the PSC says. "As we explain, the decision to build Calvert Cliffs 3, and the fate of any impact to our State from that project, lies in the Companies' hands at this point, not ours..." the order says.

-- Ouch! "It is unfortunate, though, if public officials, churches, Chambers of Commerce, business owners, the press and, most of all, the Companies employees' have been (mis)led to believe that our decision approving this Transaction guarantees that Calvert Cliffs 3 will be built."

-- The commission punts on the pay of Constellation CEO Mayo Shattuck, saying it has no jurisdiction. "But even if we might, as individuals, question the wisdom of paying anyone millions of dollars a year given CEG's recent history, it is our role as Commissioners to focus on BGE and its ratepayers."

-- No kidding! "We will not pretend that this rebate, which will amount to approximately $100 per residential customer, will make a significant difference in anyone's bill, although every little bit helps."

Posted by Jay Hancock at 12:22 PM | Permalink | Comments (8)
Categories: BGE/electricity
        

The Public Service Commission's decision on EDF Group's proposal to buy half of Constllation Energy's nuclear-energy business for $4.5 billion is due at noon. Stay tuned.

Also, Hanah Cho reports:

Baltimore's Constellation Energy Group said Friday it remains committed to selling half of its nuclear power business to a French utility after reports surfaced earlier this week that Electricite de France wants to scrap the $4.5 billion deal.

Posted by Jay Hancock at 11:19 AM | Permalink | Comments (0)
Categories: BGE/electricity
        

Today's column:

Maryland Comptroller Peter Franchot, meet your nightmares. Yours, too, Gov. Martin O'Malley. And yours, President Barack Obama and Fed Chairman Ben Bernanke.

Their names are Matthew and Meredith Targarona. They live in Towson, and they are cutting spending, increasing savings and paying down debt.

Since the financial crisis hit last year, they've been saving more than $1,000 a month and applying it against their home-equity loan. They paid off the loan a few weeks ago - "a really great feeling," says Matthew, 28, who works for Verizon.

They don't have any credit-card debt. And instead of getting a new car, they recently repaired Meredith's 1999 Subaru.

Read the whole thing here.

Posted by Jay Hancock at 8:37 AM | Permalink | Comments (1)
Categories: The Great Recession
        

Be careful using reports in the French press to jump to conclusions that EDF Group will scrap plans to invest $4.5 billion into Constellation Energy's nuclear-power business. It may be true that Henri Proglio, CEO designate of EDF, expressed doubts about the state-owned electricity company's U.S. plans. But I wonder if he understands what dumping the Constellation deal would involve.

Several news organizations say Proglio views EDF's agreement to buy half of Constellation's nuclear-electricity business skeptically. The reports emerged after Proglio met in closed session with a parliamentary committee that oversees the state-owned electricity giant. Politicians gave anonymous quotes to the press afterward.

As noted in a previous post, Les Echos states flatly that Proglio "would like... to exit a proposed joint venture with the American Constellation." Le Monde says, "He would prefer to find an exit." A Reuters piece is more nuanced. (These are my {rough!} translations.)

According to a legislator who did not wish to be named, Henri Proglio expressed doubts about EDF's latest acquisitions. "He said that, for England, the deal had to be

completed but that it was too expensive. For the United States [Constellation], he said he wasn't sure that it had to be done," [the legislator said.] Asked if Henri Proglio had suggested that EDF reject the Constellation operation, this legislator replied in the negative.

First, beware of blind quotes. Second, I wonder if Proglio has read the fine print of the Constellation deal. If the $4.5 billion investment in the nuclear venture doesn't go through, Constellation holds an option to unilaterally sell EDF several of its U.S. fossil fuel plants -- mainly dirty coal generators -- for up to $2 billion. Proglio's going to have to spend some cash on Constellation one way or another. Does he really want the coal plants instead of the nuclear stake?

Of course, the nuclear deal may die anyway if Maryland's Public Service Commission rejects it or imposes conditions that Constellation deems too severe. Constellation may be just as happy as EDF to end the proposed expansion of their nuclear partnership. It apparently doesn't need EDF's $4.5 billion any more. With the coming of carbon taxes, it might rather hang onto 100 percent of its nuclear business and jettison the coal plants.

UPDATE: The English-language press weighs in this morning.

The Wall Street Journal:

PARIS (Dow Jones)-- The French government has so far no position on whether state-controlled power company Electricite de France (EDF.FR) should drop its delayed $4.5 billion bid for a stake in U.S.-based nuclear group Constellation Energy Group Inc. (CEG), a French government senior official told Dow Jones Newswires Friday.

"There has been no decision made yet and so far, the government has no position for now," the person said, under conditions of anonymity.

The Financial Times:

EDF, the French nuclear power operator, faces pressure from the government to abandon its US foray, where regulatory difficulties have delayed a $4.5bn deal with Constellation Energy.

The French utility has agreed to buy 49.9 per cent of Constellation's nuclear assets and build four nuclear reactors with the US company.

However, government officials told the Financial Times that a reflection was under way over whether EDF - 84 per cent owned by the French state - should focus on Europe, which would demand heavy investment.

Posted by Jay Hancock at 6:07 AM | Permalink | Comments (2)
Categories: BGE/electricity
        

EDF Group, parent of Electricite de France and partner of Constellation Energy in an expanded joint venture and proposal to build a third nuclear reactor at Maryland's Calvert Cliffs, has a new boss. Henri Proglio is his name. People have been wondering whether he would take a different approach to EDF's expanded partnership with Constellation, which is under review at the Maryland Public Service Commission.

Now Thibaut Madelin, energy correspondent for Les Echos, is stating as a fact, without offering any evidence, that Proglio wants to dump Constellation.

In a piece about Proglio's appearance before the French economic affairs legislative commitee, Madelin says Proglio "would like... to exit a proposed joint venture with the American Constellation." Lower down in the piece Madelin says this:

Henri Proglio, who would like to make the group's French operations transparent to determine the true cost of nuclear development, seems at any rate ready for strategic change. He wonders about the proposal to buy 50 percent of the nuclear assets of the American Constellation. An exit could be delivered on a plate in coming days with the pending decision of the Maryland public service commission. This would allow the operation under certain conditions. Henri Proglio is free to accept them or not.

Without any on-the-record evidence from Proglio or EDF, I would treat the report cautiously. Still, Les Echos has been ahead of the curve and correct on previous EDF developments.

Posted by Jay Hancock at 11:29 AM | Permalink | Comments (6)
Categories: BGE/electricity
        

The pathetic lengths to which Magna Entertainment will go to obtain slots at Laurel Park just got longer. First Magna and boss Frank Stronach botched their bid for a license. They didn't put up the required $28.5 million in earnest money. Then they threw a fit after their bid was rejected, arguing that they didn't pay because the money wasn't refundable. Then they argued that, because the state was looking at changing the sites for some of the successful bidders, that was tantamount to reopening the process and they should be allowed reentry.

Now they're throwing partner Joe De Francis and his partners under the bus, hoping that their absence will let the state countenance Magna's bid. De Francis et. al. were supposed to get 65 percent of Laurel slots profits for the first five years and a diminishing amount over the next 15 years. De Francis personally would get 11.7 percent for the first five years, documents show -- millions. Magna is asking the bankruptcy court to terminate that deal.

One question: What took Magna so long? Bankruptcy is all about rejecting contracts. The profit-sharing contract with De Francis is at the tiptop of the list of binding deals that Magna regrets. Even if Magna doesn't get a license in this round, jettisoning De Francis would yield a theoretical greater share of slots profits for any future ventures. That makes Magna look look more valuable, which is what its creditors want. But for the owner of Pimlico and Laurel to get slots anytime soon is still a long, long shot.

Posted by Jay Hancock at 9:11 AM | Permalink | Comments (15)
Categories: Slots
        

Ed Hale's 1st Mariner Bank has its headquarters in 1st Mariner Tower, but the building itself is owned by Hale's personal real estate company. Now that Corporate Office Properties Trust has bought the tower from the financially distressed Hale, where does that leave him? Hard to know exactly at this point. He has lost the tower, in which he may once have had equity of tens of millions of dollars, and the development potential of nearby land. He has to move out of the penthouse apartment that he claimed when he built the tower. (COPT says it's going to turn the pad into more offices.)

But Hale avoided foreclosure proceedings. The fact that he agreed to sell to COPT suggests that the deal was on terms more favorable than he would have gotten if he had lost the property involuntarily. We don't know the terms at this point. My guess: COPT paid off Hale's $84 million loan from Natixis at some slight discount and let Hale walk away with a minor amount of cash. Hale wasn't talking to my colleague Hanah Cho on Wednesday, but COPT chief Randall Griffin told her that "it's a win-win for everyone involved" and that "Ed gets to strengthen his financial position."

We may find out what that means during a COPT conference call today. In any event it seems doubtful that Hale will raise enough capital from the deal to rescue 1st Mariner, which is in its own difficulties.

UPDATE: Hanah Cho reports on the conference call. You can't tell how much Hale got out of the deal, if anything, because COPT, while it disclosed the gross price, won't break down which money went where. COPT did buy the Natixis note at a discount.

Posted by Jay Hancock at 6:50 AM | Permalink | Comments (8)
Categories: Finance
        

The bankrutpcy proceeding of Erickson Retirement Communities has understandably upset the 23,000 residents of the company's 19 communities and their families. People who live with Erickson at Charlestown, Oak Crest, Riderwood and other places have a substantial investment in the communities in the form of their apartments. When residents die or move out of a community, Erickson has always paid back the "entrance fees" for the apartments, which can run up to $600,000. Residents want to know if the bankruptcy will affect Erickson's ability to do that.

Having reviewed lots of documents and talked to bankruptcy specialists, I believe that Erickson residents will be insulated from the financial trauma at the parent company. Peter Chapman, publisher of Erickson Retirement Bankruptcy News and a longtime bankruptcy watcher, goes further.

“From a customer's perspective, bankruptcy should be a non-event," Chapman told me. "The company's goal is that the bankruptcy doesn't impact the individuals that they are providing service to. They're telling the bankruptcy court: 'If we disrupt our customer base, we're out of business.' I don't think anybody's going to object to that."

What he's saying is that it's in nobody's interest -- not Erickson, not Erickson's creditors, not the guy who's buying Erickson, not the nonprofit corporations that own Erickson's communities -- to abuse residents. It's in everybody's interest to ensure that Erickson as a business continues as normally as possible.

In response to many queries, I'll go over again how Erickson's entrance fees work. They're not as solid as owning title to a house or condo. Erickson residents have no legal property interest in their apartments. Instead, they sign a contract that says the nonprofit community will repay

the money after 1) they move out and 2) a new resident pays an entrance fee. There is a clause that allows the nonprofit community to pay back a discounted entrance fee if it can't sell the apartment for the same amount. Some residents believe Erickson keeps their entrance fees in a bank until they move out. Not so. The 2007 IRS filing for Oak Crest, for example, shows total residents' deposits of $236 million but less than $3 million held for residents, including pending refunds.

That said, however, no Erickson resident has ever failed to get back his/her full entrance fee, to my knowledge. And, as Chapman says, it's in Erickson's interest to try hard to ensure they continue to get full refunds. It's a key part of the company's marketing schtick. The residency agreements are signed with the nonprofit Erickson communities, not Erickson corporate. The communities are legally separate from Erickson corporate and are not part of the bankruptcy proceeding.

Prospective Erickson buyer Jim Davis has committed to buy Erickson corporate's assets for $100 million, assume $500 million in debt and put $50 million new cash into the company, new court filings show. That should help the company's liquidity. So will the debtor financing it gets as part of the bankruptcy process.

One of the first things Erickson did in bankruptcy court was to request the judge's permission to put prospective residents' deposits in escrow. Reports Erickson Retirement Bankruptcy News:

The Debtors [Erickson] pointed out that the residents' willingness to pay its Initial Entrance Deposit to the non-for-profit organizations is dependent on their conviction that the Debtors' bankruptcy cases will not negatively affect them.

I can't guarantee that no present or prospective Erickson residents will be hurt by the bankruptcy. But it looks like the company understands that it's in its best interests to try to see that they're not.

Posted by Jay Hancock at 6:30 AM | Permalink | Comments (30)
Categories: Erickson Bankruptcy
        

The stock market crash of 1929 got cranked up on Black Thursday, Oct. 24. But it really took off the following Monday. Investors read about the Thursday drop in Friday's papers, and they fretted about it over the weekend. On Monday they bailed. The Dow plunged 13 percent on Oct. 28 and another 12 percent the next day, says Wiki.

On dshort.com's graph below of four bad bear markets, the trauma of October 1929 can be seen at the far left of the gray fever line. As you can see, the pain had only just begun. The blue line represents stocks' performance in this particular crisis. We can be thankful that it has diverged from the pattern of 1929 and the 1930s.

Posted by Jay Hancock at 12:21 PM | Permalink | Comments (0)
Categories: Finance
        

Given the Public Service Commission's extensions of looking into EDF Group's attempt to buy half of Constellation Energy Group's nuclear-power business, one wonders how long it will take the PSC to consider Baltimore Gas & Electric's request to install smart meters and get electricity customers to partly pay for them. And how will the PSC rule? Smart meters are essential for energy conservation and will save BGE customers money over the long run.

But that doesn't mean the PSC will say yes. And there are important items for the PSC to examine. At the top of the list is making sure people who are aggressive about cutting energy use and reaping rebates with smart meters aren't gaining at the expense of passive consumers who conduct business as usual and pay the higher peak rates BGE wants to charge. The PSC needs to make sure premiums earned by energy misers come from systemwide savings. BGE says this will be the case, but the PSC needs to make sure.

I queried BGE about this. Mark Case, the utility's senior vice president for strategy and regulation, says BGE had asked the commission to decide by Oct. 1. They couldn't do that, which makes sense given that the EDF stuff is on their plate -- plus everything else they regulate. Even so, the PSC has committed to making a decision by the end of the year, which for the commission is pretty quick. Says Case:

We and Pepco had both asked for a PSC decision by October 1 to give us the greatest chance for DOE funding, knowing how intensely competitive the stimulus grant process would be, and knowing that some state Commissions had already come out in support of Smart Grid and AMI. The PSC put together what they felt was as aggressive a schedule as they could support that would still allow them to do an intensive and comprehensive review.

They committed to a decision by year-end and their scheduling order and commitment was submitted as part of our DOE application package. Ultimately DOE decided the merits of our application were strong enough to warrant funding, even without the certainty of the Maryland regulatory review.

Posted by Jay Hancock at 11:05 AM | Permalink | Comments (4)
Categories: BGE/electricity
        

Legg Mason, the money-running firm whose assets under management have fallen from $1 trillion to less than $700 million, billion, thanks to falling stock values and withdrawals from its funds, has entered a new phase. Underperforming public firms such as this are always under risk that an outside investor will decide he has better ideas about how to build shareholder value than the guys in charge.

Nelson Peltz, who has a long record of such agitation, has taken on that role at Legg. He has 4 percent of its stock now. Expect him to accumulate more. Financial types I talk to around town believe there is a decent chance that the firm Chip Mason built will not be independent in a couple years. If this turns out to be the case, Peltz's arrival will be the first step in this process.

But the sale of Legg is far from guaranteed. Legg is recovering on its own -- faster than the economy. Peltz may be satisfied with less-drastic outcomes. Here is part of today's column. Read the whole thing here.

The arrival of Peltz and his 4.3 percent ownership stake increases the uncertainty. Given what Legg has been through, it was hard to imagine that the pressure on Bill Miller and the firm's other money managers to perform could have been any greater. But it just intensified. "His appearance is not good news for management," says Charles M. Elson, a business professor and corporate governance expert at the University of Delaware. "But it may be good news for the shareholders."

Posted by Jay Hancock at 8:21 AM | Permalink | Comments (4)
Categories: Finance
        

Iceland was maybe the last wealthy country to get McDonald's fast-food restaurants. Writing in the Guardian, Alda Sigmundsdóttir says they first arrived in 1993. Reykjavik has three. Now they're closing, victims of the global financial crisis, which hit Iceland especially hard. Iceland's currency, the krona, has plunged, which means the country can't afford the imports it once enjoyed. So the irresistible march of globalization and its herald, the Big Mac, suffer a setback.

As Yglesias points out, in many countries McDonald's operators reduce currency risk by buying local supplies with the local scrip as much as possible. Perhaps they could source fishburgers in Iceland, but the potatoes and beef and chicken may have been a problem.

Sigmundsdóttir blames McDonald's strict specs:

Apparently McDonald's has very stringent standards when it comes to production of its foodstuffs. For a market as small as Iceland's, it is not economically viable to invest in the equipment required to churn out, say, chicken nuggets. Hence most ingredients have had to be imported from a massive McProduction plant in Germany.

Posted by Jay Hancock at 10:03 PM | Permalink | Comments (1)
Categories: The Great Recession
        

Even as the new Case-Shiller report shows that house prices rose a little in August, James Kwak and Simon Johnson show in the Washington Post how propping up home prices via tax incentives is like ingesting crack or heroin -- you have to keep taking bigger and bigger doses to get the the same high. (HT Calculated Risk.)

What happens when you artificially prop up housing prices? Imagine the credit were expanded to all home buyers and made permanent. This would simply boost housing prices at the low end of the market by close to $8,000, since all buyers would be willing to pay $8,000 more. (Prices would rise by a little less than $8,000 because at higher prices, more people would be willing to sell.) Whom does this benefit? Not first-time home buyers. It benefits people who already own houses (and their real estate agents) because it's a one-time boost in housing values.

This would be just the latest chapter in a long history of government policies to boost housing prices -- the mortgage interest tax deduction, the capital gains exclusion on houses, the extension of the mortgage interest tax deduction to second houses, etc. Each of these policies pushes up prices just once; if you want to keep pushing up housing prices, you have to keep adding sweeteners.

Posted by Jay Hancock at 9:22 AM | Permalink | Comments (2)
Categories: The Great Recession
        

Baltimore Gas & Electric was been awarded $200 million in federal stimulus money to install "smart" meters that will let consumers save money by spending less on electricity during times of peak use, Paul West reports in today's paper. No matter what you think of BGE and its parent, Constellation Energy, this is great news. Smart meters will be critical for cutting energy use, reducing carbon emissions, reducing the need to build new generators and making the grid more efficient and reliable. The federal money means the cost to BGE customers to install the meters will be much less. (Over time the meters will save customers more than they cost them.)

Among other things, smart meters will pay BGE customers bonuses for cutting back at times of high use, alert BGE when there are outages, eliminate the need for meter readers and make sure your bill is always up to date. Don't oppose smart meters just because electricity deregulation failed in Maryland for residential customers. Deregulation was a supply-side solution; it was supposed to induce power companies to build new generation plants in Maryland, which would lower prices and solve looming reliability problems. That never happened. Smart-meters are a demand-side solution -- one that's more subject to regulatory control and is better for the planet, in any event.

Here is my July column on BGE's grant application:

The computer in my toaster might be more powerful than the one that guided Apollo 11. But half a century after Robert Noyce launched the cyber age by inventing the silicon-based integrated circuit, computers are curiously scarce in one huge and critical part of daily life.

When power goes out in your neighborhood, Baltimore Gas & Electric has no idea until somebody picks up a phone and tells it. BGE still has to send out meter readers to figure out bills.

Households are clueless about daily electricity price fluctuations. It's like not knowing when strawberries are on sale at Safeway.

What does it cost to run a load of dishes? Bake a turkey? Watch I'm a Celebrity, Get Me Out of Here? Unless you're a power geek, you don't know.

BGE's ambitious "smart meter" program promises to bring the electrical grid up to the technology standards we expect from bank accounts, cell phones and coffee makers.

Done right, it would deliver amazing efficiencies, cutting the use of expensive, peak-use power, reducing pollution, increasing reliability and lowering long-term costs after a modest initial investment.

After a decade of deregulation that turned out to be a payday for electricity sellers and a disaster for consumers, smart meters might give the little guy a chance to fight back.

I'll give possible reasons why BGE and parent Constellation Energy proposed a program that seems against their interests. But first let's look at the big picture.

No market works without good information passing between buyers and sellers about the value of what's exchanged. To take an extreme case, the old Soviet Union collapsed partly because prices set by central planners bore zero relationship to reality, causing shortages, resource misallocation and inefficiency.

But market information about U.S. electricity - at least for residential and small commercial users - hasn't been a whole lot better. On hot summer days, the wholesale price of electricity can spike 10- or 20-fold, but most retail users never know. They pay the same rate as for kilowatts burned at midnight.

BGE's smart meters, by contrast, would track pricing and pay bonuses to people who avoid the most expensive kilowatts.

Eventually smart meters may help consumers distinguish between dirty coal electricity and clean solar power. They'll also enable dryers and other smart appliances with wireless devices that transmit power-usage data to a central source.

The meters won't just be smarter. Consumers will get smarter, too. That'll help everybody.

If we start buying less energy, we can delay building expensive new generation plants. If we learn how much it costs to run each appliance, we'll pay more attention to efficiency and use.

Reducing growth in electricity demand will reduce upward pressure on prices from the generators we already have. Phasing out meter readers will save costs, too. You'll never get an "estimated" bill again. When your power goes out, BGE will know right away. (Getting the company to fix it will pose the same old challenge.)

BGE's claims that smart meters will save consumers billions sound plausible. Peak, summertime electricity is that expensive.

All the benefits certainly justify the price of buying and installing smart meters, which will cost households the equivalent of a cup of coffee a month for 15 years. It'll be even less if BGE gets federal stimulus money to help pay for it.

BGE's proposed program makes sense, too. Smart meters, which have the capability of pricing electricity hour by hour, could easily make life miserable for consumers by burying them in detail. As shown by the derivatives and bonds that precipitated the mortgage collapse, free-market complexity can obscure good economic information just as well as the Soviets ever did.

But BGE's system would be simple, sending consumers one obvious signal to cut consumption on maxed-out days. Even raising the thermostat a degree or two will produce results. Regulators are more likely to approve BGE's plan to reward efficient users with bonuses than a scheme that penalizes inefficient users. In BGE's pilot programs frugal users reaped as much as $40 in rebates on a few "peak use" days.

The state must make sure the system is fair - especially BGE's proposal to drastically raise daytime summer electricity prices for everybody. Mark D. Case, BGE's senior vice president for strategy and regulatory affairs, says prices at other times would be reduced in a way that is "revenue neutral." Make sure they are.

Why would BGE float a proposal that, if all goes as advertised, will deprive it of billions in revenue? The answer is that BGE's profit is based on its investment in assets, not its revenue. The smart grid wouldn't hurt its return.

The tougher question is why BGE parent Constellation, whose generation plants supply BGE with megawatts, would go along.

One reason may be that its plants mainly serve normal, day-to-day consumption, not peak use.

Another is that smart grids are the unstoppable trend of the future, and Constellation may figure it might as well climb on board. The medical industries have signed on to health-care reform. Constellation boss Mayo Shattuck seems to want to shape the new grid rather than stand by and watch it happen.

After all, how much deeper into the 21st century can we go with electricity-delivery technology that was cutting-edge in 1920?

Posted by Jay Hancock at 8:46 AM | Permalink | Comments (1)
Categories: BGE/electricity
        

The conditions outlined by Gov. O'Malley for regulators to approve the Constellation Energy Group -- EDF Group deal are similar to conditions he put directly to Constellation earlier this year. He wants 1) A one-time, 10 percent credit to BGE residential customers; 2) A capital infusion from parent Constellation into Baltimore Gas & Electric; 3) A contribution to a fund for lower-income utility users; 4) A moat and walls around BGE to prevent Constellation or any future owner from raiding it for resources.

Added up, all this will easily exceed $600 million at a time when both Constellation and EDF are tight on capital. The 10 percent credit for BGE gas and electric customers would exceed $200 million. Add another $50 to $100 million for the Universal Service Fund for lower-income households. Add at least another $400 million infusion for BGE to get its common-equity ratio up to levels that will make O'Malley and the Public Service Commission happy.

All this money would have to be placed on the counter when the deal closes next year, if not earlier. (However I could see everybody agreeing to have Constellation increase BGE's equity over time instead of all at once.) I wonder how Constellation's bond-rating agencies, which are already putting pressure on the company, would react if the company agrees to these conditions.

Posted by Jay Hancock at 9:58 AM | Permalink | Comments (19)
Categories: BGE/electricity
        

The business law section of the Maryland Bar Association has started a blog featuring opinions on business law from courts across Maryland. "The blog postings are 'just the facts' synopses of the opinions, without the expression of editorial opinion," says tax lawyer Stuart Levine. "However, the blog allows comments and readers can use that facility to debate the relative merits/demerits of any opinion."

One of the cases I enjoyed was able to understand was this one on the home-improvement company whose contract with the homeowner was voided because it wasn't licensed. (OK, so the blog isn't Gawker.)

Posted by Jay Hancock at 1:48 PM | Permalink | Comments (0)
        

Erickson Retirement's bankruptcy should not affect the creditworthiness of three of its communities, says Fitch Ratings. Fitch maintained existing bond ratings on Charlestown and Oak Crest in metro Baltimore and on Greenspring in Virginia. This should reassure those communities' counterparties, including residents who have paid entrance fees that they hope to get back out when they move or die.

Here's what Fitch says:

Fitch Ratings currently maintains ratings on three continuing care retirement communities (CCRCs)- Charlestown Retirement Community (rated 'A' with a Stable Outlook by Fitch), Oakcrest [sic] Village (rated 'A-' with a Stable Outlook), both in Maryland, and Greenspring Village (rated 'BBB+' with a Stable Outlook) in Virginia - that are managed by Erickson Retirement Communities (ERC).

Fitch believes that the bankruptcy filing of ERC will have no effect on the ratings of these facilities, as all are separate, independent 501(c)(3) organizations, unaffiliated with Erickson. The only financial ties that these organizations have with Erikson are fees they pay as part of cancellable management agreements that they have in place with ERC.

In discussions with the management of the Fitch-rated communities, Fitch

confirmed that the contracts remain in effect and there has been no effect on operations.

The most significant risk of the bankruptcy, with respect to Fitch's ratings, could be an adverse effect on the marketing of residential units. Each of the facilities is aware of this and has plans in place to address this risk.

Fitch will continue to monitor the situation and, if appropriate, will update investors as more information becomes available.

Posted by Jay Hancock at 11:06 AM | Permalink | Comments (5)
Categories: Erickson Bankruptcy
        

On Thursday James R. White, director of strategic issues for the Government Accountability office, testified before Congress on tax credit for first time home buyers. Included in the paperwork he submitted is a state-by-state breakdown of people who so far have claimed the first-time homebuyer credit.

Maryland is low on the list of per-capita claims, ranking 34th in the country, with 23,831 buyers claiming the credit as of Aug. 22. Total credits claimed for Maryland came to $166.2 million, or less than $7,000 per house on average. The failure of many Maryland buyers to max out the credit to $8,000 seems to indicate they are buying inexpensive shelter, especially for Maryland. Condos, maybe. To get $8,000 in credit you only have to spend $80,000 on the dwelling.

(UPDATE: Reader David M. has a far better grasp on what's probably going on. In comments he says: "Really? I think it's far more likely that many Marylander's using the tax credit make more than 75,000/person or 150,000/couple, which also reduces the amount you can claim. Maryland has a high median income and thus, high real estate costs." Thanks, David.)

Tops for per-capita, first-time homebuyer credit claims were Nevada, Utah, Arizona and Florida, where they have lots of empty houses to get rid of. Places at the bottom of the list were West Virginia, New York, Hawaii and the District of Columbia. Naturally people buying homes for the first time tended to have lower-than-average incomes, the GAO reported. That's one reason Maryland, one of the highest-income states in the country, has seen less tax-credit action than other states.

GAO also reported discouraging news about the ability of the tax authorities to catch people cheating on the credits -- those who really aren't first-time buyers, for example. Among other problems, the IRS didn't require people claiming the credit to provide documents proving that they were qualified for it, GAO said. Here we go again. You heard of liar-loan mortgages? Welcome to the liar tax credit.

Here's what the GAO said:

IRS faces significant challenges in determining if taxpayers are complying with the numerous conditions for the credit.

For example, to determine eligibility, IRS must verify that taxpayers have not owned a house in the previous 3 years and verify the closing date on home purchases. Other challenges include enforcing the $500 per year payback provision in the 2008 credit. According to recent IRS data, up to $7 billion could be repaid to the federal treasury over the 15-year period of this provision.

One reason assuring compliance is a challenge is that IRS did not require substantiation, either by the taxpayer or from a third-party source, to validate the information on the Form 5405. For example, IRS decided that requiring taxpayers to attach supplemental documentation about a home sale to a tax return would be burdensome.

Posted by Jay Hancock at 6:09 AM | Permalink | Comments (11)
Categories: The Great Recession
        

The Dow Jones Industrials and the S&P 500 are diverging even more than usual today. As I write the Dow is up 75 points, or .8 percent, while the S&P is up only 2 points, or .2 percent. The difference is accounted for by only four Dow stocks, all of which are having a great day. 3M and Travelers are both up by about $2.50 per share. McDonald's is up $1.65 and IBM is up $1.20. Between them those four stocks account for 60 points in the Dow's increase today.

It's another example of how the Dow is a lousy indicator for the overall market. The S&P is a better gauge of what's going on with big-cap stocks.

Posted by Jay Hancock at 2:00 PM | Permalink | Comments (0)
Categories: Finance
        

Barry Ritholtz weighs in on what a bad idea it is to extend the $8,000 home buyer tax credit that expires Nov. 30. Congress is talking about it again -- only now they're discussing raising the credit to an amazing $15,000 and offering it to all home buyers instead of just first-timers. He references a Brookings report that estimates 85 percent of the people using the first-time buyer credit would have bought houses anyway. So the cost to taxpayers per extra house sold isn't $8,000. It's $43,000.

For a $15,000 subsidy extended to everybody buying a house as their primary residence, Brookings estimates, the cost to taxpayers move each extra house would really be $253,000!

Beyond the huge expense and fiscal inefficiency, Barry says, the credit is keeping house prices from finding their true level, which is bad for the economy in the long run.

Perverse though it may be, the mass foreclosures are helping to drive prices back to normalized historic levels....

All of the home mortgage modification programs and foreclosure abatements are attempts by politicos to “ease the pain.” These programs have proven themselves to be ineffective in preventing defaulting mortgages from going into foreclosure. More than 50% of all mods slip into foreclosure again, and in some instances, we see 70-80% delinquency rates.

But the real question is “Why are we trying?” Except for those instances where there has been fraud or predatory lending, we really should not intervene. The foreclosure process is restoring prices to where they should be.

Posted by Jay Hancock at 8:58 AM | Permalink | Comments (14)
Categories: The Great Recession
        

Talking with Dan Rodricks on WYPR about Maryland's budget, noon to 1. 88.1 FM.

Posted by Jay Hancock at 10:46 AM | Permalink | Comments (0)
Categories: Politics
        

Gov. O'Malley's public admission that settlement talks with Constellation Energy Group have failed leaves him with two choices. Unable to get a scalp from Constellation in the way of rate cuts or a giveback of CEG boss Mayo Shattuck's pay, he can retaliate by having the Public Service Commission reject EDF Group's proposed investment in CEG. (Yes, I know the PSC is supposed to be independent of the governor. Yeah.)

EDF wants to buy half of CEG's nuclear-power business for $4.5 billion. Both companies have said that if the deal goes through they'll build a new nuclear unit at Calvert Cliffs, creating thousands of construction jobs and giving Maryland badly needed new, carbon-free electricity. Both companies have said that without the EDF injection they won't build at Calvert Cliffs. So O'Malley's choice No. 1 jeopardizes the nuclear unit, which he says he wants, and exposes him to voter backlash if the deal fails. (He's running for reelection next year.)

Choice No. 2 is to have the PSC approve the EDF investment without any concessions from Constellation. That's a downer for O'Malley, too. It makes him look weak. His administration has yammered about Constellation and Shattuck's pay all year, and now he backs down. That defeat obscures the substantial

concessions that O'Malley has already gotten from Constellation but apparently didn't think were sufficient to present to voters next year.

If the PSC rejects the EDF investment, Constellation would have a good case in court to go through with it anyway. The PSC, which regulates Baltimore Gas & Electric, not CEG or EDF, really doesn't have jurisdiction over the proposal. But would Constellation go through the hassle of litigation? Wall Street analysts believe it can survive without the EDF money, and it might be good for Constellation shareholders to hang onto 100 percent of the nuclear business, anyway. EDF has a new CEO and is trying to preserve cash. I believe you're looking at the next step in the failure of the EDF deal and the scrapping of the Calvert Cliffs expansion.

UPDATE: O'Malley spokesman Rick Abbruzzese points out that the PSC has the ability to approve the EDF investment with conditions. It's possible that EDF and Constellation could agree to conditions imposed by the PSC, such as BGE rate relief. But if Constellation bosses wouldn't budge on behind-the-scenes talks that O'Malley said THEY initiated, why would they make concessions through the PSC?

Posted by Jay Hancock at 8:51 AM | Permalink | Comments (19)
Categories: BGE/electricity
        

Understandably, the seniors who live in Oak Crest, Riderwood, Charlestown and other Erickson Retirement communities want to know how Erickson's bankruptcy proceeding and impending sale affects them. "Are the residents losing their deposits through the bankruptcy proceedings?," one commenter asked on an earlier Erickson post. I'll try to tell as much as I know. Most of the news is good.

Erickson officials have told my colleagues that the changes won't jeopardize the refundable fees that residents pay when they buy in to a community, which can run up to $400,000. This makes sense. The Erickson communities are set up as non-profit corporations, nominally separate from the for-profit Erickson company that landed in bankruptcy court on Monday. This means that the residence contracts customers have signed can't be canceled by the bankruptcy judge.

But to better-understand the entrance fees, you need to know that they really aren't refundable "deposits" in the sense that money is held in escrow until the resident moves out or dies. They never have been -- bankruptcy or not. The money, once paid in, goes to Erickson corporate purposes. Rather, Erickson agrees in a contract to repay the entrance fee once a resident moves or dies.

Below I reproduce language from a bond prospectus regarding the fees for Sedgebrook, a relatively new Erickson community in Illinois. I understand that this arrangement is typical for Erickson communities. At Sedgebrook, refunding the entrance fee happens ONLY after the apartment is assigned to a new resident and a new entrance fee is paid. That's how the company finances the refunds. And in the fine print, Erickson says it doesn't guarantee that a resident will get back all the money s/he put in. If the company has to cut the price for the new entrance fee below what the former resident paid in, the former resident might not get all the money back. So the

risk for entrance fee refunds doesn't seem to stem from anything going on in bankruptcy court. Rather, it has to do with market risk that the demand for Erickson spaces will be lower when a resident moves out than when s/he moved in. However, I have not heard of any Erickson resident who did not get back the entire entrance fee when it came time. If you hear anything different, let me know.

Here is the relevant language from the bond contract:

The amount of the refund of the Entrance Fee which the Corporation is obligated to pay to a resident and which a resident is entitled to receive shall normally be the amount of that resident's Entrance Fee. If a resident's Residential Unit is not reoccupied within a reasonable period of time, in the Corporation's sole discretion, by a qualified new resident with an Entrance Fee equal to or greater than such resident's Entrance Fee, then the Corporation will so notify such resident or such resident's personal representative. Under the Residence and Care Agreement, such resident or resident's personal representative may then direct the Corporation to re-market the Residential Unit for a discounted Entrance Fee, and the amount of the discounted Entrance Fee, when received from a qualified new resident, will constitute the amount of the refund to such resident.

Posted by Jay Hancock at 6:30 AM | Permalink | Comments (22)
Categories: Erickson Bankruptcy
        

The black and tan camouflage uniforms, designed by Under Armour, will have a Wounded Warrior logo patch. The jerseys worn by the Gamecocks and Terrapins will have words such as courage, loyalty and integrity on their backs.

More great publicity for Baltimore's Under Armour, which gets its cachet from selling "authentic" gear to real jocks. Quasi-military camo uniforms may seem even cooler and more authentic. And the Wounded Warrior Project is a great cause.

UPDATE: Thank you commenters for the correction. If Maryland and SC were really playing each other wearing the same jerseys, of course the refs would have an even more difficult time than usual.

Posted by Jay Hancock at 1:42 PM | Permalink | Comments (4)
Categories: Marketing
        

Of course you discern the irony. Ed Hale's 1st Mariner Bank contributed in its own small way to the housing meltdown by lending millions of dollars to homeowners who subsequently defaulted on their mortgages. 1st Mariner had to foreclose on dozens of homes, mostly in Virginia but some in other states. The bad loans have brought the bank close to insolvency and seizure by the Federal Deposit Insurance Corp., although it looks like it has until next summer to raise new capital.

Bad housing loans prompted the Maryland General Assembly to pass a law slowing down foreclosures. Lenders were swooping in within a few weeks of people missing payments, and the legislature wanted to make sure the process wasn't too greased. Now Hale is claiming homeowner status himself to try to forestall foreclosure on 1st Mariner Tower, the Canton landmark owned by his real estate company and containing 1st Mariner's headquarters. It seems like a stretch. Most of the 17-story building's floors are offices.

But at the tiptop is what is probably Baltimore's most fabulous bachelor hideaway, with stunning views of the harbor to the west and Baltimore to the north. Descriptions of it seem to be scarce. But Hale's old penthouse, nearby in Anchorage Towers, contained "custom woodwork, the furniture, rugs and accessories from all corners of the globe," the Sun reported. It also had "pastoral paintings in thick, gilded frames that cover nearly every available inch of wall space" set in a "relentlessly masculine palette, the cognac leathers and dusky walls that evoke an Englishman's library." Hale was trying to sell that place for $2 million before he took it off the market. The pad in 1st Mariner tower is supposed to be an upgrade from that.

Hale argues in court that, because 1st Mariner Tower is his home, it qualifies for the extended foreclosure process required by Maryland law. He wants the court to at least delay an auction scheduled for Wednesday. So does Natixis bank's decision to seize Hale's tower indicate a new phase of the recession, a commercial real-estate deterioration similar to the one in the early 1990s? Or did Nataxis make the biggest, dumbest subprime homeowner loan ever? A judge will decide.

Posted by Jay Hancock at 3:45 AM | Permalink | Comments (1)
Categories: The Great Recession
        

UPDATE: For more on the bankruptcy's effect on refundable entrance fees that all Erickson residents pay when they enter a community, see this post: Will Erickson changes wipe out resident refunds?

Erickson Retirement Communities, the Catonsville assisted-living company built from scratch by John Erickson starting in the early 1980s, got slammed by the housing crisis. The company's cash flow comes largely from seniors who sell their homes, turn over the proceeds to Erickson and move into one of its communities. But when housing crashed seniors had trouble selling, and apparently that left Erickson unable to service its debt. The collapse of the credit markets meant it couldn't refinance.

The company said late today that it agreed to sell itself to Redwood Capital Investments, which is controlled by Maryland employee-services magnate Jim Davis (Allegis Group). To make the deal work, they're going to enter bankruptcy court to try to give creditors a haircut, thus reducing the amount of debt Davis might have to assume.

At this hour (7:20 p.m.), we haven't heard much from Erickson officials. But it's important to understand what's not being sold. Erickson-developed communities such as Oak Crest and Charlestown are non-profits that are separate from the for-profit company that is being dealt to Davis. Thus they should be relatively insulated from whatever trauma is affecting Erickson Retirement.

Erickson had already cancelled several developments and laid off some employees. The endgame announced today apparently removes John Erickson and his family from control of the concern he built, which employs 12,000 workers at 19 communities in 11 states. Here is the press release in its entirety:

ERICKSON RETIREMENT COMMUNITIES SIGNS DEFINITIVE AGREEMENT TO SELL COMPANY TO REDWOOD CAPITAL INVESTMENTS

• New owner will strengthen Erickson’s capital position, continue providing high-quality service and care to 23,000 existing community residents
• To pave way for company sale and establish the company for long-term success, Erickson files voluntary Chapter 11 petition to restructure debt and separate core businesses

BALTIMORE, MD (October 19, 2009)—Erickson Retirement Communities, a national manager and developer of continuing care retirement communities, today announced it has signed a definitive agreement with Redwood Capital Investments LLC, an investment company controlled by leading Baltimore businessman Jim Davis, to purchase Erickson.

The transaction, subject to regulatory approvals, will ensure that the mission of John C. Erickson, founder and executive chairman of Erickson, to serve America’s seniors, will continue for many years to come by providing a comprehensive solution to the company’s long-term capital needs.

To complete the sale of the company to Redwood, Erickson must restructure its debt. As a result, the company today filed a voluntary petition for Chapter 11 bankruptcy in U.S. Bankruptcy Court in Dallas, Texas. Given the nation’s severe economic crisis, Erickson had been in discussions with its lenders in recent months to restructure its debt but, despite good faith negotiations with certain of its creditors, it was unable to reach an out-of-court agreement. This voluntary action will not only enable the company to restructure its debt, but also to reorganize its core management and real estate businesses into separate yet commonly owned legal and financial entities. A separation of the management and development sides of the business means existing and future residents will be better protected from the volatility of the real estate development business, and allows for the resumption of building in developing communities as the economy improves.

“This strategic decision will benefit all members of the Erickson Community,” said John Erickson, company founder and chairman. “First and foremost, Jim Davis, whom I have known for years and hold in the highest regard, is a strong advocate of community residents; his top priority is their continued well being. Jim is fully committed to the values and vision of the company and will continue its mission. Equally important, this transaction allows Erickson to manage through the current difficult economic environment so the business can regain its financial footing and continue its mission to provide quality lifestyle for community residents, while also safeguarding residents’ financial security.”

Erickson Retirement Communities has two core businesses: its management arm, which provides services, care and amenities for community residents, and continues to operate successfully; and its real estate development arm, which acquires land for future campus growth, and has been significantly impacted by the recession.

The voluntary restructuring, sale of the company, and ongoing market process require court approval. Because this process has the support of Erickson’s lenders and the not-for-profit corporations that have management contracts with Erickson, Erickson expects the transaction, which is subject to approval of the Court, to be approved and consummated in the first quarter of 2010.

Erickson develops campuses that not-for-profit corporations unaffiliated with Erickson operate and typically contract with Erickson to manage. When campuses are completed, the not-for-profit corporations typically buy the communities from Erickson.

John Erickson founded Erickson in 1983 with the opening of Charlestown, an innovative full-service retirement community in Catonsville, Maryland, and has expanded the network of communities to 19. He and his wife Nancy created the Erickson Foundation, which funds various philanthropic organizations in Maryland and elsewhere.

Posted by Jay Hancock at 7:20 PM | Permalink | Comments (26)
Categories: Erickson Bankruptcy
        

From its low of 667 on March 6, the S&P 500 stock index has zoomed up 65 percent. It's fixing to close today at around 1,100. A logical question to ask is: Have stocks ever had this great a run in such a short period of time? The answer is yes. Many times. Via Barry Ritholtz, Ron Griess and the Chart Store lists the top 50 32-week periods when the S&P has gained 48 percent or more.

The large majority of them were in the Great Depression. The March 2009 to October 2009 stock advance was No. 18 on Griess's list. Only five other 32-week periods on the top-50 list weren't in the 1930s. Of course many of the 1930s advances soon reversed themselves.

The list is a little misleading because many of the 1930s periods are not mutually exclusive. For instance, the top-gaining 32-week period was from Dec. 10, 1932 to July 22, 1933, in which the S&P went up 93 percent. But the No. 2 period was Dec. 3, 1932 to July 15, 1933, which was substantially the same surge. Still, it's a little disconcerting that many of the market moves of this magnitude on Griess's list could not sustain themselves.

Posted by Jay Hancock at 3:11 PM | Permalink | Comments (0)
Categories: The Great Recession
        

Funny how Republicans whose jobs or health coverage are in jeopardy favor health-insurance reform in Washington. I've talked to one such family in recent months. Here's another instance. John Hewko, who was a Bush appointee and had to leave government when the administration changed, faces either being uncovered when his COBRA option runs out or enormous premiums from CareFirst BlueCross Blueshield -- as much as $3,000 a month for his family. CareFirst rejected him for standard coverage, he says, because of two pre-existing conditions -- stiffness in his shoulder and hip "for which I take an occasional Advil," and mild high blood pressure.

I am a Republican who did not vote for President Obama, but I support his health-care initiative because I have just experienced first-hand our system's dysfunctional wrath -- and it isn't pretty.

Like a good Republican, he attacks the Democrats for not including tort reform in their bill. Tort reform needs to be done, but it's really a sideshow to fixing the health insurance system. The billions that would be saved through fixing the malpractice system are substantial but not the main game, as I've written.

At the very most, tort reform would deliver a one-time, 7-percent reduction in medical costs, estimates Gerard Anderson, a professor at the Johns Hopkins Bloomberg School of Public Health. That's how much costs are going up each and every year. The lack of tort reform is not a reason not to pass health-care reform. Hewko doesn't come out and say so, but I bet he agrees.

Posted by Jay Hancock at 9:03 AM | Permalink | Comments (8)
Categories: Health Care
        

Greedy Wall Street was the talking point for the White House on Sunday's talk shows. As America's unemployment rate approaches 10 percent, big financial companies sit comfortably on billions in taxpayer bailouts and bankers rake in what may be record pay, "the bonuses are offensive," David Axelrod told ABC's "This Week," according to the Washington Post.

"Not only do they come for a bailout," said Rahm Emanuel on CNN's State of the Union. "They're now back trying to fight a consumer office and the type of protections that will prevent another type of situation where the economy is taken over the cliff by the actions taken on Wall Street and financial market."

But nobody's really talking about doing anything about the pay. The White House is trying to use outrage over the bonuses as leverage to get finance-reform legislation passed. The unspoken offer: We'll shut up about pay if you guys stop blocking efforts to set up a consumer financial safety agency. Treasury Department pay czar Kenneth Feinberg gets lots of headlines but what he's doing is symbolic rather than substantial -- getting Bank of America's Ken Lewis to give back his 2009 pay, waving a stick at AIG, etc.

Go ahead, Goldman Sachs partners. Sign the contract on that mansion in Bimini. Those bonuses are money in the bank.

Posted by Jay Hancock at 8:44 AM | Permalink | Comments (5)
Categories: Finance
        

There are Americans who could use a one-time, $250 bonus appropriated by Congress and approved by the president. But it's very difficult to argue that Social Security recipients should be at the top of the list. Seniors didn't get their cost-of-living increase for Social Security this year because the inflation rate was negative. Now Washington is talking about giving them an increase anyway. Why? Hard to tell. But, heck, we're handing out billions to everybody else, anyway, so why not pander to grandma, too?

The bonus would cost $13 billion. President Obama has not said how it would be paid for. In any event it's a bad idea. This is the wealthiest generation of senior citizens in history. In addition to providing Social Security, the government covers their medical costs through Medicare. Last year's cost-of-living increase for Social Security was 5.8 percent. How many workers do you know who got 5.8 percent raises last year? Social Security checks automatically keep up with inflation. Many, many workers are falling behind inflation.The senior-citizen poverty rate in the United States has fallen to about 10 percent from more than 30 percent in the 1950s.

Washington needs to stop handing out money like candy. But if it's going to write checks, how about directing them to the 1 in 10 impoverished senior citizens instead of to every single Social Security beneficiary? Or to children in poverty (34 percent of all kids 18 and under in 2007, according to the Census Bureau)? Or to workers displaced by foreign trade?

In a few years, inflation will be back and so will the COLA increases for Social Security. But I doubt seniors or anybody else will think that's a good thing, either.

Posted by Jay Hancock at 8:00 AM | Permalink | Comments (29)
Categories: Taxes
        

Sully Sullenberger is promoting his book, Highest Duty, co-written with the WSJ's Jeff Zaslow. Sullenberger of course is the guy who landed US Airways Flight 1549 in the Hudson after it got crippled by birds. I haven't read the book, but I saw him on the Daily Show last night. I'm glad he's using his platform to talk about working conditions and compensation for his fellow pilots.

The message is: If you want competent guys like me who can handle an emergency, you need to pay us decently and not overwork us. It's a message that needs to be heard, especially in the wake of the shocking revelations about working conditions for regional airline pilots that emerged after Continental Connection Flight 3407 crashed in Buffalo in February. The co-pilot was making $16,254 a year and had worked in coffee shop to pay the bills. From Sully's book:

Over the years, we've lost a good deal of respect from our management, our fellow employees and the general public. The whole concept of being a pilot is diminished, and I worry that safety can be compromised as a result. People used to say that airline pilots were one step below astronauts. Now the joke is: We're one step above bus drivers, but bus drivers have better pensions.

Posted by Jay Hancock at 10:17 AM | Permalink | Comments (4)
        

Maryland September car-sales figures are out from the MVA. Weirdly, Marylanders bought more new cars last month, after the cash-for-clunkers program expired, than they did in August, when clunkers was going full blast. At least that's what the figures indicate.

Marylanders registered 25,251 cars and trucks during August -- the monthly high for 2009 and the best result since September 2008, just as the bottom was falling out of the economy. But September 2009 new-car sales were slightly better -- 26,922. Assuming that the clunkers program stole demand from future months, I would have expected a September sales crash.

Is this a small sign of economic recovery, at least in Maryland? People bought cars in decent numbers even without free taxpayer money. There doesn't seem to be a seasonal factor; usually in recent years September sales have been lower than those in August. Maybe those who didn't qualify for the clunkers incentive read all the news stories and decided to buy a car anyway. Dealers seemed to be offering some pretty good incentives independent of the federal stimulus.

Like I said, a small sign of recovery. The Dow Jones stock index and Maryland monthly car sales are both back to where they were in September 2008. But they're still far down from their highs. In September 2003 Marylanders bought 40,000 new cars.

UPDATE: Peter Kitzmiller, president of the Maryland Automobile Dealers Association, says there may be less to the September report than meets the eye. Although the clunkers program ended Aug. 25, there was probably a spillover of paperwork into September for the Motor Vehicle Administration. That would have pushed clunker results into the September sales report that just came out.

Dealers are tellling him that "new-car sales have slowed dramatically since the clunker program has ended," Kitzmiller said.

Posted by Jay Hancock at 6:33 AM | Permalink | Comments (4)
        

Down and out with some kind of bug. If it were H1N1 it would be newsworthy, so I would deliver detailed dispatches. But I don't think it is.

Posted by Jay Hancock at 9:54 AM | Permalink | Comments (0)
        

Finally Ed Hale has sold 1st Mariner Bank's consumer finance unit, which he badly needed to do to raise cash to bolster the bank's capital ratios.The stock market is unimpressed. 1st Mariner stock is up only a nickel, to $1.27, as I write this. On low volume.

That's because Hale has to come up with at least another $10 million by the middle of next year to avoid having the bank seized by federal regulators. It's not clear how he's going to do that. Earlier this year 1st Mariner officials and analysts who follow the bank were thinking Hale could get $20 million for the consumer unit. But no. To make up the other $10 million he probably has to sell new stock in the bank -- to board members or somebody else. But a price of $1.27 is not predicting big things for today's shareholders. $1.27 says they'll either get the heck diluted out of them when new shares are issued or wiped out when the FDIC steps in. Still, the stock has recovered from pennies territory earlier this year, which bespeaks some hope.

Posted by Jay Hancock at 3:50 PM | Permalink | Comments (2)
Categories: Finance
        

In this year's General Assembly session, Del. Melony Ghee Griffith introduced a bill that would have required you, me and other Maryland taxpayers to reimburse film producers for 28 percent of their expenses incurred in Maryland. This sort of giveaway had gotten very fashionable as state politicians in dozens of states bid higher and higher to bribe producers to change shooting locations.

Michigan's taxpayers were footing 40 percent of production costs. Iowa's, 50 percent. The people who made The Curious Case of Benjamin Button swiped $27 million from the taxpayers of Louisiana. You can bet the added economic activity from that movie generated nowhere near that much in marginal tax revenue for the state. All these deals are losers for taxpayers. Fortunately the Griffith bill didn't go anywhere.

Now, reports Phil Mattera of Good Jobs First, states are realizing how stupid movie incentives are and are reducing or eliminating them:

... With states suffering runaway costs, mediocre benefits and recurring abuses, the great film tax-incentive gold rush is losing steam. Various states are eliminating, cutting back or at least debating their film subsidies. In one state, Iowa, evidence of mismanagement in the tax credit program has created a political uproar and prompted a criminal investigation.

In Iowa, says Mattera:

the state’s economic development director resigned, the head of the state film office was fired, and the tax-credit program was suspended.

In Michigan:

a state budget analyst told the state Senate Finance Committee that the incentives would never pay for themselves. Recently, Gov. Jennifer Granholm proposed scaling back the credit to help fill the state’s budget gap.

In Wisconsin:

the state Department of Commerce issued a report arguing that the credits provided little net economic benefit for the state.

In Massachusetts:

the state Department of Revenue released a report finding that only 16 percent of the wages paid by subsidized film productions went to Massachusetts residents.

UPDATE: In response to comments:

I will try to make this clear. Programs that give taxpayer money to filmmakers are not win-win. They are win-lose. Please do not confuse economic activity generated by filmmakers with taxpayer revenue generated by filmmakers. Steven Spielberg makes a new Indiana Jones movie in which Indy tries to find the fabled Lost Maryland Republican. They spent $100 million in the state.

So Comptroller Peter Franchot has to issue tax credits of $28 million, which Spielberg can resell to Black & Decker, T. Rowe Price and others with Maryland tax liability. Taxpayers have just spent $28 million. In return, let's make an assumption that ALL the $100 million spent on the film accrued to Maryland businesses and residents. (As you can see from the Massachusetts experience, this is absurd. In that state only 16 percent of the spending from subsidized films went to residents.)

To obtain a return for the state comptroller, we tax that activity. The corporate income-tax in Maryland is 8.25 percent. The top personal rate is around 9 percent if we include the piggyback. Some sales tax (6 percent) will be generated. Just to be ultra-generous, let's inflate the total assumed return to the state treasury to 15 percent -- $15 million. That's still a $13 million loss to taxpayers. Moviemakers: Win. Taxpayers: Lose.

David Noble: Amen to you. Congress needs to step in an outlaw all state-based economic development welfare.

Posted by Jay Hancock at 6:42 AM | Permalink | Comments (17)
Categories: Media
        

Business Week's Michael Mandel produces a nice chart based on Labor Department data showing which professions have added jobs in the last two years and which ones have lost jobs. I'm not sure I get the ostensible ~2% job growth in "Business and financial operations." Presumably that includes bankers, but maybe it's just the accountants and other beancounters, who may be needed to sum ledgers whether the numbers are positive or negative.

Much of the damage in banking and on Wall Street is reflected in the ~8% drop in "Office and administrative support."

Posted by Jay Hancock at 11:48 AM | Permalink | Comments (1)
Categories: The Great Recession
        

When big disasters happen we want a big solution. It's human nature to want a remedy that is seemingly proportionate to the disease. So after the terrorist attacks of Sept. 11, 2001, we didn't just ban box cutters from airplanes and rest assured that in the future no passengers would ever again allow their plane to be turned into a guided missle. (Even if terrorists overpowered the crew, passengers would gang up and thwart the mission, like the heroes on United Flight 93.) No. Instead we invaded two countries, spent more than $1 trillion, formed the Department of Homeland Security etc.

Little things can make a big difference, as Malcolm Gladwell taught us in The Tipping Point. Often they make a bigger difference than big things. The reaction to last year's financial disaster is big. We're talking about founding a consumer financial safety agency. We're going to regulate hedge funds, require new forms to be filled out, enable the hiring of even more lawyers etc. I wrote in favor last week.

But, reacting to the column, reader Mark Adams had another idea. How about if we just enforce the fraud and perjury statutes already on the books? The subprime mortgage crisis might never have happened, or at least it wouldn't have been as bad, without "liar loans'' -- borrowers and mortgage originators basically defrauding lenders by lying about their incomes and assets. Is it not astonishing that none or few if these lying borrowers are being prosecuted? Here is Mark:

Hi Jay,

The best financial regulation that could be created would be mandatory prosecution and jail time for perjury. None of the financial crises you spoke of could have been accomplished without multiple acts of perjury. In order for mortgage backed securities to go south, it took an entire network of perjurers -- borrowers, loan officers, appraisers, brokers, rating agencies. None of them ever gets prosecuted for perjury, unless a particular prosecutor is trying to leverage them for some other crime. The whole concept of having something called a "liar's loan," which originates with a sworn financial statement and application, is just insane.

When Bill Clinton was in the jackpot for perjury, I was one of the people who thought he should have been prosecuted. I voted for the guy...

twice and actually liked him as a president and as a person. But you just can't have people lying under oath at any level of society. The whole world relies on people telling the truth under oath. If they don't want to tell the truth, they shouldn't sign sworn documents.

If a particular business or industry wants to tolerate a bit of deception and dishonesty in certain transactions, it should be allowed to do so. But it shouldn't be allowed to use sworn documents in its operations. The absence of sworn documents would be a good indicator of reliability of particular types of transactions.

Posted by Jay Hancock at 8:34 AM | Permalink | Comments (0)
Categories: Finance
        

Here is part of People's Counsel Paula Carmody's response to my Wednesday column. The column was about the Public Service Commission hearings on EDF Group's proposal to buy half of Constellation Energy's nuclear-power business.

If the investment is approved, Constellation and EDF have said they'll build an $8 billion nuclear-power unit. It would be the biggest single private capital project in Maryland in who knows how long. According to the PSC's own expert witness the plant would lower electricity prices by furnishing a huge new supply of megawatts. The People's Counsel, the PSC and the governor are saying, "Gee, we're not sure." From Carmody's letter:

Once again, I feel compelled to respond to commentary about the pending Public Service Commission proceedings to consider the proposed Constellation-EDF transaction. This time, it is Jay Hancock's feeble attempt at humor in his October column that requires a response...

Mr. Hancock and The Sun continue to present this case as a battle between Governor Martin O'Malley and Constellation CEO Mayo A. Shattuck. This may be good ratings drama, but it unfairly and inaccurately belittles the issues at stake in this case for ratepayers. The coverage also reflects an unreflective acceptance of the companies' assertions about the purported benefits and lack of harm. In particular, this case is about the impact on BGE customers from EDF's purchase of an interest in significant assets of Constellation, including the existing units at Calvert Cliffs. This case is not about building a new nuclear unit at Calvert Cliffs, despite the companies' attempts to link the two, which Mr. Hancock apparently has accepted.

Posted by Jay Hancock at 10:38 AM | Permalink | Comments (6)
        

Here's the clip from my weekly talk with WBAL's Bill Vanko on what's going on in the economy.

Posted by Jay Hancock at 10:20 AM | Permalink | Comments (0)
        

Rising Medicaid costs related to federal health-care reform aren't the only medical expenses Maryland taxpayers have to worry about. Maryland provides state retirees with health insurance, and according to new accounting rules it must start funding that liability. The unfunded cost is $14.5 billion, according to the Pew Charitable Trust.

That will require an additional annual appropriation of $600 million -- more than twice what the state is already paying for employee retiree health care, according to Cecilia Januszkiewicz, who was Maryland Secretary of Budget and Management under Gov. Bob Ehrlich. She wrote a piece for the Free State Foundation on the problem and pointed out that the extra money needed for retiree health care just about vacuums up all the money that slot machines will provide. She also notes that the current administration is not talking about this extra headache, which, if accounted for, would make projected budget-gaps even worse than they already seem:

Given the magnitude of the problem, state officials should be educating the public about this significant potential liability. Yet, finding anything regarding the work of either of the commissions on state Web sites is like looking for the keys to Fort Knox.

Posted by Jay Hancock at 8:51 AM | Permalink | Comments (6)
Categories: Health Care
        

Of course metro Baltimore did very well in the Daily Beast's rankings of smartest cities. We're No. 10 out of 55 major metro areas, beating out Philly, New York and San Diego but trailing Boston, Washington and Hartford. An educated, literate workforce is Maryland's economic strength, compensating for the place's highish cost of doing business.

The methodology itself was smart. The Beast measured how much of a metro area's population went to college, how many universities a metro area has, whether or not the population pays attention to politics and whether the denizens buy nonfiction books. The biggest surprises for me were how poorly Chicago (24th), Atlanta (23rd) and LA (27th) did, and how well Hartford did (6th).

Among the losers: Fresno, Calif., Louisville, Ky., Phoenix and Harrisburg, Pa. Phoenix was 50th smartest out of 55. Its smart-city IQ of 63 was less than half Baltimore's 135.

The Beast seems to have interviewed our mayor, who seemed delighted to be asked a question that doesn't have to do with grand juries.

“We are very blessed to have wonderful schools [and] universities,” says Sheila Dixon, Baltimore’s first female mayor, “but ultimately it is the engaged, educated, and active citizenry in the City of Baltimore that deserves the recognition.”

Well, not just the citizenry of the city. Daily Beast ranked metro areas, which for us includes all the counties surrounding Baltimore.

Posted by Jay Hancock at 6:30 AM | Permalink | Comments (15)
Categories: Education
        

Congress and the White House are thinking about passing a tax credit for companies that hire new workers, the NYT reports. We keep hearing talk of Stimulus II. This is what it's likely to look like, if it happens. The idea is that, by lowering the cost of hiring, companies will do more of it. Maryland has had a job-creation tax credit since right after the last bad recession, in the 1990s.

The danger with the federal proposal is that it could supress hiring until it gets passed. Companies that are about to staff up for the economic recovery might wait until they can claim the credit. Reports the NYT's Catherine Rampell:

The biggest fear among some, though, is that the proposal might unintentionally reduce job opportunities if it sits in Washington too long without passing.

“Particularly for big employers, if they think a job creation tax credit is in the offing, it could certainly be an incentive to delay hiring,” said Lee E. Ohanian, an economics professor at the University of California, Los Angeles. “That means it could have the perverse effect of actually prolonging the recession.”

Posted by Jay Hancock at 12:43 PM | Permalink | Comments (1)
Categories: Taxes
        

Mayo A. Shattuck III, CEO of Constellation Energy, turns 55 today, according to Progressive Maryland. I wasn't able to confirm the date -- only that he turns 55 this month. In any event, it's a big time for Mr. Shattuck, and not just because he hits the double-nickel milestone. Shattuck finally becomes eligible for his fabulous, "supplemental" executive pension, worth $33 million at the end of 2008. He has had it in his grasp before, but tomorrow, if the protesters have identified his birthday correctly, he'll nail it. (Progressive Marylnd plans a "party" in front of Constellation headquarters.)

As with regular pensions, CEOs have to rack up seniority before they become eligible for retirement payouts. Unlike regular pensions, supplemental executive plans come in denominations of seven and eight figures. Unlike regular pensions, supplementals are subject to frequent tinkering and upgrades by the board to make already wealthy CEOs even more blessed. In many CEO comp packages supplemental pensions make up huge amounts of the total dough. Until a few years ago companies could hide them behind terrible disclosure rules, but the SEC finally put a stop to that. Now they're spelled out in all their glory, which over time might shame boards into downsizing the packages.

Shattuck signed on to his bonus pension when Constellation hired him as CEO in 2001. He had to put in 10 years of service and be at least 55 years old to qualify for benefits. He almost struck early paydirt in 2006. His attempted sale of Constellation to FPL Group that year would have triggered a golden parachute that included an early, lump-sum payout of the pension. (Nobody actually actually takes monthly payments from these things when they're sitting in a nursing home. As soon as they can they take the lump-sum cash, discounted to present value. The notion that these are "pensions" is a joke.)

But then public hassles over his pay prompted Shattuck to forego the early pension. Then the two companies scrapped their marriage, anyway.

According to the original timetable, Shattuck would still be two years away from completing his 10 years of service and thus not eligible for the boodle until 2011.

But last year the board, in its wisdom, decided to credit him with time he spent at Constellation as a non-executive director, thus giving him his 10 years effective earlier this year. (That was right before Constellation nearly landed in bankruptcy.) Turning 55 will complete the pension requirements for Shattuck.

His deal isn't affected by EDF Group's proposed investment in Constellation's nuclear-energy business. That doesn't trigger any kind of golden parachute. But it doesn't matter. Once he's vested, Shattuck doesn't need a trigger. Unless the board has changed his eligibility again and hasn't disclosed it, his pension parachute is now packed on his back no matter what happens.

PS. In case you're getting whiplash between this post and my pro-Constellation column in today's paper, don't. Shattuck's pay is indefensible. But it shouldn't get in the way of the state approving Constellation/EDF's plans for a new nuclear power plant at Calvert Cliffs. Blocking an $8 billion project to try to get a few million out of Constellation's CEO or a few dollars for BGE customers, as Gov. O'Malley is doing, is not an efficient investment of state resources.

Posted by Jay Hancock at 6:00 AM | Permalink | Comments (9)
Categories: BGE/electricity
        

Barry Ritholtz has the answer to the question that Nobelists, professors, economists and soothsayers have been asking for for 300 years. What drives the stock market?

Such is the result of giving two million primates lots of money and keyboards and a belief they can make a living based on numbers and letters moving around — on a screen, in a futures pit, on an exchange floor, or even under a buttonwood tree.

Posted by Jay Hancock at 11:20 AM | Permalink | Comments (0)
Categories: Finance
        

In recent years the physics Nobel has more or less oscillated between recipients who did basic research that hasn't yet translated into consumer technology and and those who set the stage for applications and products. Last year's prize went for work on "broken symmetry" in subatomic physics. The 2007 prize went for the discovery that underlies how computer hard drives work. The year before that it went to people who worked on cosmic radiation -- and so forth.

This year technology grabbed back the trophy. It was shared by researchers who discovered the process that underlies today's digital cameras and who laid the ground for transmission of data through glass fibers. (What took the committee so long to annoint Charles Kao?)

At a time of faltering innovation and a terrible economy, we need more Charles Kaos, Willard Boyles and George Smiths, without whom today's economy might look even worse.

Posted by Jay Hancock at 10:21 AM | Permalink | Comments (0)
Categories: Technology & Innovation
        

On Monday BGE said customers should expect natural gas bills will be 25 percent lower this winter compared with those of last winter. I suspect they're being conservative. Wholesale natural gas prices have crashed.

A year ago gas was selling in the Gulf Coast for 70 cents a therm; now it's 30 cents. That wholesale price isn't the whole equation -- you pay interstate shipping and local distribution charges to get it to your furnace, and those haven't changed much. Still, I bet many households will see gas bills fall by more than 25 percent, especially if this winter isn't unusually cold the way last year's was.

BGE senior VP Mark Case estimates the delivered cost for natural gas will be $1.04 per therm this winter. That suggests he's expecting a "commodity" cost -- delivered gas minus the distribution charge -- of 70 or 75 cents. Lately, BGE's monthly commodity costs have been running in the 50- and 60-cent range. So they would have to rise substantially to achieve "only" the winter-to-winter savings projected by BGE. The October commodity price, just posted, is 59 cents per therm, up from 50 cents in September. BGE has already bought lots of its gas for the winter, anyway.

As usual, Washington Gas Energy Services offers a fixed-price, competing natural-gas product to go up against BGE's floating price. For a year they'll lock you in at a commodity price of 73 cents per therm. For two years they'll lock you in at 85 cents. I'm pretty sure the one-year deal will turn out to be more expensive than BGE's default program. The two-year package I'm not so sure about. If the economy recovers in a healthy way, natural gas prices could easily be north of 85 cents for the winter of 2010-2011.

In any case, I'm sticking with BGE's regular product for now. Last season I spent $950 on BGE natural gas during November through March, or about $1.30 per therm. I could handle a decrease. How about you?

Posted by Jay Hancock at 6:30 AM | Permalink | Comments (0)
Categories: BGE/electricity
        

The exit line is getting longer at the U.S. Chamber of Commerce. Recently three big power companies -- Pacific Gas & Electric, PNM and Exelon -- resigned over the chamber's opposition to regulating carbon emissions. Then Nike said it would quit the chamber board for the same reason. Now Apple is canceling its membership. From the letter of Catherine Novelli, Apple's lobbying vice president, to Chamber President Thomas Donohue:

As a company, we are working hard to reduce our own greenhouse gas emissions by relying on renewable energy at our facilities and designing more energy-efficient products for our customers. We have undertaken this unilaterally and without government mandate, because we believe it is the right thing to do. For those companies who cannot or will not do the same, Apple supports regulating greenhouse gas emissions, and it is frustrating to find the Chamber at odds with us in this effort.

The chamber opposes regulating U.S. greenhouse gases unless all major carbon-dioxide-emitting nations promise to reduce their output, too.

Posted by Jay Hancock at 6:26 PM | Permalink | Comments (2)
Categories: Environment
        

Electricite de France, the state-owned French power company that has proposed to buy half of Constellation Energy Group's nuclear power business and build a new reactor at Calvert Cliffs, has a new boss. A week ago the government canned Chief Executive Pierre Gadonneix and replaced him with Henri Proglio, an EDF board member who is also the CEO of Veolia, a water and waste-disposal company.

EDF's deal with Constellation is the subject of contentious and seemingly never-ending hearings before the Maryland Public Service Commission, now on their second extension. EDF and Constellation (parent of BGE) had hoped to sew the deal up by now. They've said that building the new Calvert Cliffs unit (and thereby providing Maryland with badly needed, carbon-free electricity) depends on the PSC approving the EDF investment.

The change at the top at EDF has prompted speculation that the new leadership and French government might get impatient with Maryland and pull the plug on the Constellation investment. EDF is heavily indebted and took out something like an adjustable mortgage, which means that its interest payments are about to soar and that it has to sell old operations or cancel new investments to pay down debt. Says this week's Economist magazine :

The firm plans disposals, and could also back away from the deal with Constellation, because the state of Maryland is holding up the process in any case, says Mr. [John] Honore [utilities analyst with Societe Generale]. That would save more than 3.5 billion [pounds sterling].

I have predicted that the EDF/Constellation deal will fail. But I don't think EDF will be the one to walk away.

It'll be Constellation, out of pique over the PSC process and Gov. Martin O'Malley's complaints about Constellation boss Mayo Shattuck's pay -- and out of a desire to hang on to more of its nuclear business. Constellation's nuclear assets will be very valuable in coming years -- especially if Washington passes some sort of carbon tax.

EDF would probably rather sell some of its non-nuclear business in the U.K. than pull out of the Constellation deal. EDF owns what's basically the BGE of London, a company that delivers electricity to homes, factories and offices. That's likely to go on the block. The French government clearly wants EDF to become an even bigger global power in nuclear energy, and getting into the U.S. power market with Constellation is a key part of that ambition. "We want to show the world the competence of France’s nuclear” industry, French Finance Minister Christine Lagarde told LCI Television (France's CNN) last week.

Posted by Jay Hancock at 6:00 AM | Permalink | Comments (3)
Categories: BGE/electricity
        

Good story by Paul West on the connection between Democratic Sen. Barbara Mikulski's earmarked federal defense spending and donors to her campaign. She directed tens of millions of dollars in defense spending to top campaign donors Northrop Grumman, Thales Communications and L-3 Communications. She responds by saying it's all for the country and the hard-fighting troops.

"My top priority," the senator said in a statement, "is to ensure that Americans serving on the front lines have the funding, equipment and technology they need to protect our nation."

Republican Rep. Roscoe Bartlett, another Maryland defense-earmark overachiever, has a more interesting response. He doesn't know who his campaign donors are, an aide says.

Lisa Wright, a longtime Bartlett aide, said the Western Maryland congressman relies on his experience as a scientist in requesting earmarks and deliberately stays ignorant about campaign donors.

Bartlett "avoids anything to do with campaign funding," she said. His campaign organization routinely makes the names of his donors public, as required by federal election law. But the aide, asked if Bartlett knew that Northrop Grumman was a prime funding source for his re-election efforts, replied, "I sincerely doubt it."

Bartlett is enough of a nonconformist and idealist that I believe her.

Posted by Jay Hancock at 10:13 AM | Permalink | Comments (3)
Categories: Politics
        

Today's column is about increasing financial literacy and requiring Maryland high school students to take a semester of personal-finance instruction. Among the sources I consulted was this recent paper by Annamaria Lusardi of Dartmouth, Olivia S. Mitchell of Wharton and Vilsa Curto at the National Bureau of Economic Research. They write about the responses of young people to three basic consumer-finance questions. Answers are below the fold, along with the percentage of incorrect responses given for each question.

1) Suppose you had $100 in a savings account and the interest rate was 2% per
year. After 5 years, how much do you think you would have in the account if you
left the money to grow: more than $102, exactly $102, or less than $102?

2) Imagine that the interest rate on your savings account was 1% per year and
inflation was 2% per year. After 1 year, would you be able to buy more than,
exactly the same as, or less than today with the money in this account?

3) Do you think that the following statement is true or false? “Buying a single
company stock usually provides a safer return than a stock mutual fund.”

Answers:
1) More than $102. If you're earning 2% on $100, you'll have $102 after the first year. The next four years are gravy.
15 percent got the answer wrong. 6 percent said they didnt' know the answer.

2) Less. When the inflation rate is greater than your interest rate, you're losing money in "real," inflation-adjusted terms, no matter how much time has gone by.
31 percent got the answer wrong. 15 percent said they didn't know.

3) False. As you buy more stocks, your diversification goes up and your risk goes down. Since a mutual fund owns multiple stocks, it should provide a safer return.
16 percent got the answer wrong. 37 percent said they didn't know.

Posted by Jay Hancock at 7:00 AM | Permalink | Comments (4)
Categories: Education
        

This week both New York City and Maryland's Prince George's County sold bonds subsidized by the February federal stimulus package. Bond blogger Accrued Interest poses a bond wonk's version of a zen koan: Assuming both paid the same interest yield, which is the better deal? Ie., which municipality is less likely to default?

Accrued Interest chooses PG, and here's partly why:

I like Prince George's better. First, much of the County's employment is based around the Federal government, which is the one part of the economy that is still growing. New York on the other hand is in the eye of the storm in terms of finance lay-offs. But more importantly to me, New York has a more complicated budget.

In reality, neither is likely to actually miss any bond payments. So the risk is a California-style budget battle, where the situation is unresolved for months and months causing spreads on bonds to widen dramatically. Isn't that much more likely to happen in the Big Apple? Prince George's just doesn't have a complicated enough budget to create this kind of problem. New York does. Hell, New York has gone through such budget battles multiple times in the past.

Posted by Jay Hancock at 10:16 AM | Permalink | Comments (2)
Categories: Finance
        

Well, at least Bank of America's board did something right, sort of. CEO Kenneth Lewis, who bought Merrill Lynch a year ago even when he knew it would be terrible for Bank of America shareholders, is leaving. No surprise there. Here's what's unusual: Technically he gets no golden parachute. He has no employment contract with the bank. And, even more unusual, in 2002 Bank of America froze the "supplemental" pension that Lewis and other bigwigs get.

Lewis will still have an executive pension, but he hasn't accrued seniority benefits in it since then. The present pension policy at Bank of America is to have execs get more or less the same pension as everybody else -- a great idea.

This is not to say that Lewis will be in poverty. His pension will still be huge. The present value of the whole package grew by $854,256 last year alone. His total compensation for the last three years was $10 million, $24.8 million and $27.9 million, respectively. Sure, a big chunk of that was in stock options that are WAY underwater. (Strike prices were in the $50 and $40 ranges. The stock is now $17.) But under the bank's rules Lewis gets to hang onto his options even after he retires -- until they expire. That gives him up to 2014 or so to wait for the stock head back up.

Another good thing about Bank of America's exec pay is the relatively few perks that top dogs get. "We provide very few executive fringe benefits," the bank says. Of course, "very few" for corporate royalty still means tons to you and me. Last year Lewis got $14,000 in home-security and parking benefits, $220,000 of free personal travel on company jets and $18,000 in free financial and tax planning. But he can't head off to the golf course just yet. Dealing with the litigation over last year's decision to buy Merill Lynch will probably take years.

Posted by Jay Hancock at 8:29 AM | Permalink | Comments (0)
Categories: Executive Pay